Last updated January 18, 2019
As predicted by 17 of 18 economists surveyed by Bloomberg, the Bank of Canada chose not raise rates on January 9th but it seems almost certain to raise rates by the end of March. The pause in rate increases was primarily intended to accommodate the province of Alberta whose economy is once again challenged by low oil prices. Once rate increases resume, the next increase in the Bank Rate to 2% will still be 0.5% short of what would be considered a normal or neutral interest rate range for good economic times. “Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” the Bank of Canada said on January 9th. In other words, unless there’s a recession, you can expect at least two or three more rate increases.
Looking ahead, here's a quarterly analysis of interest rate forecasts provided by leading financial institutions in Canada and translated these into mortgage rate forecasts. I've provided a forecast to the end of 2020 to help you decide whether to lock in your mortgage rate or leave it floating.
Overall, there's an upward trend in rates with little debate over how large the rise will be in the next 6 months and but there is more uncertainty in the long run. Most economists anticipate a quarter point increase in the Bank Rate in early 2019. You’ll hear the media make a big deal out of whether the Bank of Canada will raise rates again in January or March however focusing on a two month timing difference is too short-sighted for people negotiating a mortgage renewal.
Variable and adjustable mortgage rates are tied to the Bank Rate (the rate at which banks can borrow from the Bank of Canada).
By the end of 2020, a majority of economists expect at least three more rate increases to 2.5%, and Scotiabank expects the bank rate may reach 3.00% in 2021. Overall, with a replacement for the NAFTA trade agreement negotiated, banks have accelerated their expected rate increases. The Bank Rate was 4.00% in 2007 so the forecast rates are not outside the normal range long term range.
The Prime Rate will increases with the Bank Rate, so it is possible variable and adjustable mortgage rates could rise 0.75% to 1.25% by the end of 2020. If this worries you, then consider a fixed rate mortgage.
The big news here is that the Desjardins and National Bank economists expect rates to take a sharp downward turn toward the end 2020, which would be an appropriate response to a recession. In our previous forecast RBC showed a similar downward prediction but subsequently they've adjusted their forecast upward. Fears of a recession are nothing new and a recent Huffington Post article covered this exact topic. In truth, a recession is likely inevitable but the timing is devilishly tricky.
What you can take away from these forecasts is that rates will likely be the same or higher than today but they are unlikely to drop lower than today’s rates unless there's a recession.
Looking at house prices, both higher rates and a recession would but downward pressure on prices so expect housing headwinds for the news couple of years.
Based on these forecasts, you can see that locking in today’s 3.7% 5-year mortgage rate will start benefiting you in 2020 IF variable rates climb to 3.90%.
If you are inclined toward a fixed rate mortgage, our advice is to speak to a Mortgage Broker as early as possible to lock in a rate. You can lock in a rate up to 120 days before closing on a home sale or the renewal of your mortgage.
|Rate||Dec 2016||Dec 2017||Today Dec 2018||Mar 2019||Dec 2019||Dec 2020|
|5 Year Variable Mortgage Rate||1.90%||2.60%||3.15%||3.15%||3.65%||3.90%|
|5 Year Fixed Mortgage Rate||2.49%||3.25%||3.70%||3.93%||4.26%||4.24%|
|5 Year Fixed Mortgage Qualifying Rate1||2.49%||3.25%||5.70%||5.93%||6.26%||6.24%|
Lock in a 5-year fixed rate?
Buy a home now or wait for the next cycle
The average forecaster predicts variable rates will rise another 0.75% over the next two years, and some predict further rate increases in 2021. Current rates are at the low end of the 10-year range so there is a good likelihood these forecasts are correct.
Although the forecast rate increases are not guaranteed to happen, if you are getting a new mortgage or renewing an existing mortgage, it would be prudent to lock in your mortgage rate for 5 years. You will be in good company because CMHC says 72% of home buyers in 2017 chose a fixed rate mortgage.
However, if you believe you may want to sell your home or move in the next few years, then locking in a rate can result in a large penalty fee if you cancel the mortgage before the full term is completed. The fee can be quite large, so keep this in mind when deciding to lock in an interest rate.
If you are planning to buy in the next 3 years, keep in mind that rising rates reduce the amount of mortgage financing a bank can offer you and this will erode your home buying budget. This effect was amplified by the addition of the qualification stress tests in January 2018. The silver lining is that it reduces home buying budgets for all home buyers and this will out downward pressure on home prices.
To get access to experts who know what every lender is doing, consult a mortgage broker. They have the broadest number of options to find you suitable financing.
If you’re not ready to buy a home, you can wait until rates begin to drop again but there is no guarantee the Bank Rate will ever be as low as 0.25% (ie., 2010) again. The previous all-time low was in 1950 when it dropped to 1.5% which is close to the rate we have today. For context, during WWII, when food was rationed, the Bank Rate was 2.5%.
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